Portugal does not need bailout, Sócrates insists

Portugal on Tuesday continued to vehemently reject the need for a humiliating bailout to resolve its crisis as Japan pledged to help out the euro zone by buying European bonds.

"The government of Portugal is not going to ask for any financial aid for the simple reason it is not necessary," Portuguese Prime Minister José Sócrates said. "Portugal is in a position to fund itself in the markets."

Sócrates said Portugal's public deficit in 2010 would be below the 7.3-percent target set by the government. Spending rose by only 1.7 percent, compared with a forecast 2.5 percent, while revenues rose 5.3 percent, more than the budgeted figure of 4.5 percent. "The budget will be clearly below forecast," the prime minister said. "Portugal is doing its job and doing it well."

The Portuguese leader described reports that Lisbon is under pressure to accept assistance from the European Financial Stability Facility (EFSF) as "rumors and speculation that do not help the country and which make market conditions worse."

Finance Minister Fernando Teixeira dos Santos took the same line. "We are doing our job. Clearly, Europe is not doing its work to guarantee the stability of the euro."

However, Portuguese wire service Lusa quoted central bank board member, Teodora Cardoso, as saying that Lisbon would be better off seeking external aid. "It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt," Cardoso said.

The risk premiums of Portugal and under-fire euro-zone countries eased yesterday as Japanese Finance Minister Yoshihiko Noda said Japan may buy up to 20 percent of the bonds to be issued by the EFSF as part of the rescue plan for Ireland. "I think it's appropriate for Japan to purchase a certain amount of bonds to boost confidence in the EFSF and make a contribution as a major country," Noda said.

The euro-zone sovereign debt markets were also underpinned by Greece's successful auction of 1.95 billion eurosin six-month Treasury bills at a yield of below 5 percent. Portugal is due to test the waters on Wednesday with the sale of up to 1.25 billion euros in four- and 10-year bonds.

Recession to return

In its winter economic bulletin, the central bank forecast that GDP would contract by 1.3 percent as domestic demand shrinks due to the government's spending cuts, including lower public sector wages, and tax hikes included in the 2011 state budget. The government is looking to reduce the shortfall in its books this year to 4.6 percent of GDP. In its fall bulletin, the central bank estimated the economy would stagnate this year.

"The performance of the Portuguese economy will be marked by the stepped-up correction of the macroeconomic imbalances accumulated over the past decade," the report said.

Budget consolidation will result in a drop of 2.7 percent in household spending and a fall of 4.6 percent in public spending, with domestic demand shaving 3.9 percentage points off growth. This will be partly offset by a positive contribution of 2.5 points from net trade- exports minus imports.

The central bank said local lenders will need to continue to tap the European Central bank for funding for some time to come because of problems in accessing wholesale debt markets.